Quantum computing promises to revolutionize the way we process information by taking advantage of the principles of quantum mechanics. It will offer unprecedented computational power, enabling solutions to complex problems that currently cannot be solved with classical computers. This innovative technology has the potential to transform industries such as cryptography, drug discovery, and artificial intelligence. IonQ Inc (IONQ), FormFactor (FORM) and IBM (IBM) are among the stocks offering exposure to this potentially explosive sector.
However, despite the huge potential in this sector, I am neutral on FormFactor (a semiconductor company with profitable exposure to quantum computing), bearish on IonQ (a rising, pure-play quantum stock), and bearish regarding the technology giant IBM.
But first, what is a quantum computer? Well, it takes advantage of quantum mechanics, which describes the behavior of matter and energy at the atomic and subatomic level. There are two concepts that underpin the potential use of quantum mechanics: superposition and quantum entanglement.
Quantum computers differ from those we use today because they use quantum bits (qubits) instead of bits, the most basic unit of information in computing and digital communication. Qubits, unlike normal bits, can be in several states at the same time. This is known as superposition and allows quantum computers to process large amounts of information in parallel.
Entanglement, on the other hand, occurs when two qubits become linked and cannot be described independently, regardless of distance. It is as if the qubits are connected by an invisible thread, allowing instant communication. Albert Einstein called it “spooky action at a distance.”
These phenomena allow quantum computers to perform complex calculations exponentially faster than classical computers for certain problems. The problem is that the technology simply doesn’t exist yet and some people believe that we will never be able to harness the power of quantum mechanics for computing. These three companies, IonQ, FormFactor and IBM, offer different levels and types of exposure to quantum technology. Let’s explore.
IonQ is a pure play of quantum technology, specializing in trapped ion quantum computing. The stock has risen over the last month, but unfortunately, I am bearish on this one. The valuation seems too high, given the execution risk.
Trapped ion quantum computing uses individual ions suspended in a vacuum as qubits, offering several advantages over other quantum computing technologies, such as high fidelity, long coherence times, and precise control. The company seeks to dominate quantum networks, a field that could be worth $38 billion by 2040.
As noted above, IonQ leverages superposition and entanglement to transfer data between quantum processors that are physically separated. Interestingly, the company has made some notable progress, including recording 99.9% fidelity on two-qubit gates using barium ions. The company has also demonstrated ion-photon entanglement for commercial use and ion-ion entanglement.
In turn, this has led to major deals and partnerships, including a $54.5 million contract with the US Air Force Research Laboratory and year-to-date bookings of $72.8 million. million dollars.
As a result of its deals and developments, IonQ shares are up 156% in 12 months. However, I am concerned that the stock is overbought. The company’s market capitalization has surpassed $6 billion despite a revenue forecast of just $315 million by the end of 2027. Additionally, IonQ is expected to operate at a loss throughout the period. It also doesn’t help that the company’s price-to-book (P/B) ratio is the highest among its competitors.
The current valuation introduces a high degree of execution risk into what remains a commercially unproven technology field. It is also a field that requires a lot of investment and faces competition from large technology companies with comparatively bottomless pockets. So despite the great promise, I’m bearish on IonQ simply because its valuation seems disproportionate right now.
On TipRanks, IONQ comes in as a Strong Buy based on three Buys, one Hold, and zero Sells assigned by analysts in the last three months. IONQ’s average share price of $19.23 implies a 40% drop from current levels.
See more IONQ analyst ratings
I am neutral on FormFactor, a prominent player in the semiconductor industry, because it appears to be trading broadly in line with growth expectations. FormFactor provides critical test and measurement technologies spanning the entire chipset lifecycle and offers a wide range of products including probe cards, analytical probes, probe stations, metrology systems and cryogenic systems.
Recently, FormFactor has ventured into the exciting field of quantum computing through its collaboration with Tabor Electronics and QuantWare. The Echo-5Q, a 5-qubit full-stack quantum computer designed for research and education, integrates FormFactor’s advanced cryogenic technology with QuantWare’s high-performance quantum processing units, resulting in a 250% improvement in T1 relaxation times compared to similar systems.
For this reason, analysts see the quantum sector as a tailwind for this semiconductor company. The stock could be an unconventional play in quantum computing, as the company is already making profitable sales in the quantum computing sector. However, at least for now, its quantum offering is still in its early stages.
Looking at FORM shares more broadly, they trade at relatively high multiples (35.4 times forward earnings), a 40% premium to the IT segment. The price-earnings-growth (PEG) ratio of 1.78, despite having a 7% discount compared to the sector, does not fill me with confidence. At least for now I’m neutral.
Additionally, on TipRanks, FORM is listed as a Moderate Buy based on three Buys, three Holds, and zero Sells assigned by analysts in the last three months. FORM’s average share price of $53 implies a 32% increase from current levels.
See more FORM analyst ratings
The last stock I’m looking at today is IBM, a global leader in technology and innovation, and unfortunately, I’m also bearish. The company has been at the forefront of quantum computing development for some time, but the stock is overvalued relative to its expected growth.
As part of its strategic focus, IBM has invested heavily in quantum research and development, positioning itself as a key player in the rapidly evolving quantum landscape. One of IBM’s most important milestones is the development of a 1,121-qubit chip known as the IBM Quantum Condor. This marked a substantial leap in qubit capacity. The company had ambitious plans, including commercializing 1,000-qubit computers in the near future and developing a 10,000-qubit quantum computer.
In addition to broader efforts in the field, the company’s open source Qiskit framework facilitates collaboration and innovation within the quantum community, further cementing its role as a pioneer in the field. IBM does not detail how much it spends on quantum computing research. However, it is undoubtedly among the largest investors in this new technology. Its current achievements, coupled with its abundant resources, undoubtedly position it well to lead the quantum era.
However, I am concerned about IBM’s valuation despite its quantum potential. The stock trades at 21.8 times forward earnings, a 13% discount to the sector average, but has a PEG ratio of 4.4, a 129% premium to the sector. In short, given that the stock looks overvalued compared to its earnings forecasts, I can’t help but be bearish.
On TipRanks, IBM is listed as a Moderate Buy based on five Buys, seven Holds and one Sell assigned by analysts in the last three months. IBM’s average share price of $229.75 implies a 1% increase from current levels.
See more IBM analyst ratings
Unfortunately, none of these stocks are currently asking me to buy. However, quantitative metrics, which I tend to favor, can be prone to missing new opportunities in emerging sectors. However, my sense is that these companies are still some distance away from truly commercializing quantum systems and that makes investing today a challenge, given the execution risk.
